Crude rises as investors snub dollar-based equities

With the US dollar sinking broadly against all major currencies, investors and hedgers this week pulled out of dollar-based equities and bought commodities, pushing up all commodity prices.

But crude price gains were caused not only by dollar weakness as the forward curve of crude futures contracts increased its strongly contango profile.

Adding to the bullish sentiment was the reduction in the crude volatility index and a sharp decline in futures positions held by the largest commercial petroleum hedgers. Evidence is increasing that the credit rating agency, Standard & Poor, is set to downgrade America's AAA credit rating on the basis of its current and expected debt burden.

While it is acknowledged that the US spending stimulus packages have likely warded off a great depression of the scale of the 1930's, the US deficit, now measured in the trillions, can no longer be ignored, and the likelihood that even the great United States economy would be incapable of soon paying off such a massive accumulation of red ink has increased.

A flight to safety - which had always meant adding US dollars to portfolios - now requires their sale in favour of some other currency and purchasing commodities which hold their value against dollar declines.

The fear now is that the long-predicted dollar decline is underway and will be less than "orderly," with some serious dislocations resulting.

All this boosted petroleum commodity complex prices this week. Along with copper, gold, and other basic commodities, crude and its derivatives - both physical and financial - gained.

The US benchmark West Texas Intermediate traded on the New York Mercantile Exchange, rose to $61.55 per barrel, up from last week's close of $56.34 per barrel; while the local Dubai Mercantile Exchange's benchmark Oman heavy sour hit $60.15 per barrel after closing last week at $55.85 per barrel.

New York heating oil nearby futures, the chosen hedging vehicle for all middle distillates, finished the week at $1.53 per gallon, up from last week's $1.41 per gallon.

This week's Commitments of Traders report from the US Commodity Futures Trading Commission, released every Tuesday, showed a broad reduction in futures contracts held, indicating less fear of price volatility, against which futures and options on futures would need to be purchased to protect physical holdings, both on the short side and the long.

- Dalton Garis is Associate Professor of Economics and Petroleum Market Behaviour at the Petroleum Institute, in Abu Dhabi.